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Dexia deal reached at 11th hour

Late last night, France and Belgium reached an agreement on dismantling the first victim of the eurozone debt crisis. Will it be the last?

by Emma Haslett

Published: 10 Oct 2011

Last Updated: 06 Nov 2012

It might have taken a marathon 14-hour meeting to reach an agreement, but France and Belgium finally came to a decision late last night on how to share the cost of dismantling Dexia, the Franco-Belgian bank that’s become the first institutional casualty of the eurozone debt crisis. Shares in the bank had plummeted at the end of last week after fears that its €21bn (£18bn) portfolio of debts from countries like Greece and Italy meant it could go bankrupt. But while the French seem pretty convinced that the rest of their banks are safe, others aren’t as sure…

Under the agreement, Belgium will fork out €4bn to buy the bank’s Belgian arm, which, with 6,000 staff and deposits worth €80bn from 4m customers, is largely retail-based. France, on the other hand, will merge its municipal lending division into its state investment fund, finances French public bodies, and already includes bits of the Banque Postale and the Caisse des Depots et Consignations. The Luxembourgish division will then be sold off – leaving a ‘bad’ bank, with a bond portfolio worth €100bn; and healthy businesses which include Turkey’s Denizbank, its asset management operation, and its joint venture with the Royal Bank of Canada.

The three countries have also clubbed together to guarantee up to €90bn of borrowing over the next 10 years, with Belgium providing 60.5% of the guarantees, France providing 36.5%, and Luxembourg, 3%. Well – it’s only a little country. That reflects how important reaching an agreement was to Belgium: when the Dexia stuff became apparently, Moody’s reacted by promptly putting the country’s Aa1 rating on review for a possible downgrade. Although that’s partly, of course, because Belgium had promised Dexia’s customers that they wouldn’t lose anything – which, of course, was very, very expensive.

The question now is whether Dexia is an anomaly, or the beginning of the trend. Last week, there were worries that some European banks (including RBS) would need shoring up with additional capital, based on their exposure to eurozone debt. French finance minister François Baroin seemed optimistic this morning, saying that he didn’t believe any more banks will need to be rescued – ‘certainly not French banks’, anyway. Others are getting increasingly exasperated at the lack of a concerted plan to tackle the issue, rather than the piecemeal fixes we’ve seen so far. The clock is ticking…